The purpose of this study is to empirically analyze if a bilateral trade between two countries leads to a foreign direct investment (FDI) using a time series data spanning over the period 2000–2017.
The Engle-Granger method of co-integration analysis is applied to the data to estimate if China’s export to Ethiopia led to an inflow of FDI from China to Ethiopia over the long run.
The results indicated that bilateral trade (import from China) is a major determinant of Chinese FDI inflow to Ethiopia over the study period.
A number of studies have been conducted on the determinants of FDI in Ethiopia using time series data at different points of time. However, none of them tried to analyze what attracts FDI from an individual country. Accordingly, this study has concentrated on FDI from China and its relation with bilateral trade between China and Ethiopia as China is the number one FDI source and trade partner of Ethiopia.
